Chapter 6: Elasticities
1. It is worth emphasizing to students that elasticities are just extensions of supply and demand analysis
2. Emphasize that the intuition behind the elasticities of supply and demand is that of the cost of
3. As a setup for the coming chapter on perfect competition (as well as the section on the difficulties of
maintaining collusive agreements against cheating), ask students why the elasticity of demand for the
output of one farmer can be very high (there are a large number of good substitutes–the similar crops of
the large number of other farmers), even if the elasticity of the market demand curve for that crop is
relatively low (there may be few good substitutes for the crop).
4. A good class discussion topic involving elasticity issues is that for years, the U.S. has tried multiple
subsidy programs to increase college attendance by low income students. If the elasticity of demand for
5. As an elasticity application, ask students why the elasticity of demand facing hospitals for baby
deliveries, which traditional insurance covered 80% of, is likely to be low. Show students that a $100
6. A good way to check on student understanding of the connection between the elasticity of demand
and total revenue is to present an argument between two partners in a business, where the first partner
argues that they need to raise their price to increase their revenues, while the second argues for a price
reduction for the same reason–to increase total revenue, then ask students what each of the partners is
arguing about the elasticity of demand for their product.
7. Why good elasticity of demand illustration is why a college might want to increase regular session
tuition (inelastic demand during the regular school year, because of few good substitutes, especially for
8. Give students additional examples of lower prices for more elastic demanders. For instance, lower
prices per ounce for 2-liter bottles than cans (because it implies you drink more soda, which would
9. As a test of student knowledge, a good in class question to ask is: Suppose the government of the
District of Columbia reasoned that because the demand for gasoline is relatively inelastic, they could raise
a substantial amount of extra tax revenue by imposing a city tax on retail gasoline sales. Do you think
their reasoning is accurate? Then you can get students to see that while the elasticity of demand for
10. One way to reinforce the fact that linear demand curves have different elasticities at different ends is
the commonsense observation that the average price is higher (making the percentage change in price
lower) and the average quantity demanded is lower (making the percentage change in quantity higher)
near the top than near the bottom.
11. Reinforce student understanding of cross and income elasticities as just extensions of what they
already know. They already know what it means to be a substitute or a complement, but the cross
12. A good in-class checkup question to test for student confusion about the various elasticities is to ask
why a change in total revenue does not depend on the elasticity of supply when demand changes (since
13. It is often worth making a point to students than non-economists routinely underestimate the power of
market mechanisms (that is, the magnitudes of the relevant elasticities of supply and demand) because
14. A good analogy to elasticity and tax incidence questions is to the game of dodge ball. The
government throws the balls (taxes) because they want to hit the players (raise revenue, which can only
15. Good extensions of tax incidence analysis include why the employer half of Social Security and
Medicare taxes are actually largely, if not completely, borne by workers, and why property taxes on rental
property are borne by owners (at least in the short run).
16. A good historical illustration of markets in action was the response to tax differences of Canadians
crossing the border to the U.S. to buy Canadian blend cigarettes, which they then smuggled back into
17. An excellent application of tax analysis is to discuss the question of tax exporting. Showing students
how state corporation taxes, corporate property taxes, hotel bed taxes, airport fees, other taxes
18. Remind students that both supply and demand elasticities are greater in the long run than in the short
run for the same reason the time it takes to discover new alternatives, make complementary changes,
etc.